VC’s Missing 97% of the Trade :: Blockchain Letter, November 2017

Pantera Capital
Nov 2, 2017 · 14 min read

Dear Community,


I was on a panel where the moderator asked the panelists to describe Bitcoin as succinctly as possible. The other panelists launched into the usual complicated descriptions of cryptography, hash power, and all these really intricate things. I said that could describe Bitcoin in four letters: It’s MoIP — Money over IP. Blockchain is going to disrupt business models the same way that VoIP disrupted the telephony market.
Back in the day, there used to be a monopolist in one country, a physical copper wire across the ocean, and a monopolist on the far end. The only way that a person in the US could call a person in the UK was to use those two monopolists and their copper wire. When we realized that you could route voice over the internet — and around these monopolists — the prices dropped over 99%, the quality went up, and the quantity exploded several orders of magnitude. (There isn’t enough copper on Earth to transmit all the data that goes across fiber optic cables now on the internet.)
Bitcoin is MoIP — Money over IP. It’s a way to route money around the oligopolists who have controlled correspondent banking for five centuries. It allows a person in any country to send any amount of money to anyone anywhere on Earth. For a technology to be disruptive it must be better, faster and cheaper than the legacy technology. For most of bitcoin’s history it has been essentially free, essentially real-time, and absolutely borderless. After bitcoin’s governance crisis, either bitcoin will return to that or another blockchain which is essentially free and essentially real-time will replace it. Essentially free, essentially real-time, and borderless is very disruptive.

When a technology is disruptive it’s called a category killer. Bitcoin is a serial killer — it’s going to rip through dozens of different industries. We can foresee a handful of these applications already — cross-border money movement, secure online transactions, financial settlements, wealth storage. However, blockchain will also have use cases we can’t imagine today, just as there were unforeseen use cases for the various internet protocols of the early 90s.

As an aside: When old-school skeptics say bitcoin is a bad currency — because it’s too volatile, they miss the entire point that Bitcoin will disrupt serially. Today Bitcoin **is** a terrible unit of account. That’s the point — it’s massively undervalued as a payment rail, post-currency ledger, micropayment system, etc. So it is not a classically-defined currency because it surges up too quickly. (This has got to be the first time in recorded history where people are complaining that a currency sucks because it gaps UP. Argentines and Zimbabweans should be so lucky.)

For the past eight years bitcoin been an incredible vehicle to speculate/store/create wealth. One of the last things bitcoin will do is be a stable unit of account. When it does — and the skeptics announce that it can now be considered a decent currency — it will probably be trading at $500,000 /BTC.


We’ve shared this graphic before: In the internet era, the rent-seeking applications captured all the value. The protocols they were built on top of captured almost none.

In the most extreme case, Tim Berners-Lee invented the web and essentially got nothing. Mark Zuckerberg, who may not have even invented Facebook, ended up with majority voting rights on a data monopoly which extracts $40 billion annually from its customer-producers.

The business model of web companies is to entice the consumer to use your service so you can tax them. Blockchain inverts that value capture. Blockchain allows all contributors to share in the success of their network. Blockchain is a cooperatively-owned contribution-based society.

Protocol developers and user-contributors now have a way to share in the value they create. When you mine or buy Bitcoin, or Ethereum, you actually own a piece of the protocol. Now all those efforts are incentivized to make that protocol useful and more widely available to everyone. In the blockchain ecosystem, the developers, the protocol, and the early community members share in the value creation. As the network grows, contributors are frequently rewarded with cryptocurrency or tokens in the project. And then, if the project is successful and there’s a network effect, the value of those tokens goes up.

It seems that most VCs have missed that the vast majority of the value is being created in the protocols themselves — not the rent-seeking applications built on top of these protocols. Interestingly, the applications built on top are usually UI’s which tend to be open source. The reason they are open source is you can’t trust what they’re doing under the hood if they’re not. If an application isn’t open source, it defeats the purpose of using blockchain in the first place.

To put concrete numbers on the graphic above, we tabulated the blockchain space. The most valuable company in blockchain is Ripple — currently valued north of $2bn. However, the vast majority of that value is a pass-through of their ownership of 62% of their native protocol token XRP. The sum of the value of all the other companies in the space (Coinbase, Xapo, Bitstamp, Brave, et al) is approximately $5bn. The market value of the protocols themselves is approximately $180 billion. Those focused on investing only in venture equity/the applications are missing 97% of the value in the ecosystem. We’ve graphed the reality of this value capture:

Even if you invested in Coinbase in the seed round, you would have been better off in plain old Bitcoin. You would have made more money being long the protocol. The same thing goes for pretty much any other company in space.


It’s ironic that the venture capitalists who have historically been leading the disruption in the other sectors, are now typically not able to or choose not to invest in cryptocurrencies and ICO’s. The typical venture firm is only investing in that 3% slice of applications.

It is the protocol developers who are disrupting the disrupters — disintermediating venture capitalists by accessing capital directly from investors via ICOs.


Pantera Capital has had a thesis of investing into local exchanges since the inception of its venture capital fund. Local exchanges have an advantage of a local team who understands the culture and marketing of a specific geography in addition to having the relationships for banking and regulations. In June 2014, Pantera investigated and became the lead US investor in the largest cryptocurrency exchange in Korea, Korbit. Korea was a compelling geography for a local exchange investment because of the country’s familiarity with virtual currencies, becoming one of the first countries to adopt them for gaming, having a government that is pro-innovation, having a large mobile ecosystem.

In spite of increased competition, Korbit always maintained the highest level of compliance and security, never having been hacked. The company continued to execute on their vision of being a robust exchange for professional traders and an exchange that would offer new digital assets ahead of their competitors. Last month, we were proud to announce that Korbit had been sold to Nexon, a large gaming company, for $150mm, marking the largest cryptocurrency venture exit to date. Pantera is extremely proud of Tony Lyu, CEO of Korbit, and the entire Korbit team for propelling the exchange and cryptocurrencies to tremendous adoption in Korea. We have high hopes of the Korean ecosystem and will continue to support entrepreneurs building great companies in the space.


What is a fork? What is Segwit2X? What does it mean for Bitcoin investors?

Segwit2X is a hardfork in the Bitcoin blockchain, scheduled to occur at a specific block height, approximately occurring on November 16th. When this block is reached, a portion of Bitcoin’s nodes will update to a new protocol for processing Bitcoin transactions. Segwit2X implements a block size increase from 1MB to 2MB which may increase the transaction capacity of the Bitcoin Segwit2X network. It has been supported by various Bitcoin businesses but does not have support among Bitcoin Core developers. Core supports alternative methods of blockchain scaling. After the Segwit2X nodes pass the update, the transactions they verify will be incompatible with the legacy blockchain. They will form a second blockchain that shares the history of the first. This will give existing Bitcoin owners tokens on the Segwit2X chain.

A fork, at the technical level, is a divergence in the consensus state of the blockchain ledger between the network nodes (miners). Usually, these forks arise from disputed updates to the network protocol. Some nodes accept and update; some do not. Thus, the consensus state of the ledger breaks down, leaving two sets of nodes each with their preferred version. To token holders, this can be a positive development since the tokens they historically held will be listed on both blockchains. More explicitly, they will own twice the number of tokens and the sum of their value may exceed the value of their original tokens.

In drawing parallels between blockchain phenomena and traditional financial practices, some compare forks to stock dividends. Forks result in a dividend-like scenario where ownership of a token is rewarded. For example, Bitcoin holders have been rewarded several occasions. Namely, Bitcoin Cash and Bitcoin Gold, among other valuable tokens, were “airdropped” to Bitcoin holders via forks.

Price dynamics through forks vary. Sometimes contentious fork politics can hurt the price of a token. In-fighting between developer groups in Bitcoin has sometimes driven users to other coins with more harmonious development activity. However, looking strictly at token value, forks tend to be net positives for owners. Within Pantera’s funds, forked tokens will be held and/or sold. To the extent that they contribute to the performance of the fund, the value will pass through to our LPs.


Past generations souped up their automobiles, and sang rock ’n’ roll songs about them. This generation tricks out their virtual personas, then streams themselves playing online games on YouTube. Says the founder of OPSkins, the world’s largest centralized market place for trading virtual items, “The video game skins trading economy is one of the largest consumer markets that most people have never heard of.”

OPSkins is now preparing to transfer their virtual marketplace to the blockchain. Named the Worldwide Asset eXchange, WAX is a decentralized platform which serves all virtual item market participants — buyers, sellers, listing agents, item escrow fiduciaries, appraisers, affiliates — to exchange merchandise, apportion fees, and settle transactions quickly and securely.

We look forward to participating in their mid-October token sale. WAX will give the community of over 400 million online video gamers the ability to host their own secure virtual item exchanges on the blockchain, allowing for transparent high-frequency transactions at extremely low costs. Not only will this provide an alternative to the gaming companies presently monopolize sales of virtual items, but it will require no direct investment in hardware, security infrastructure or payment processing on behalf of the gamers, allowing for a rapid crossover to the WAX blockchain.


Amid ballooning medical costs, AI senses one of its first true applications, where technical capability intersects with economic opportunity. Machine learning algorithms can now substitute for a doctor for many diagnostic procedures. This will help healthcare companies improve patients’ care and experience. Using the industry’s most advanced natural language processing platform, gives users immediate, accurate insights from medical data. Any time of the day or night, patients can interact with the blockchain for medical information.’s team is teaching machines the language of biology and training the first generation of AI in natural language comprehension and computer vision. Founded by Walter and Sam De Brouwer in 2016, is a good application of a blockchain: there are compelling reasons for wanting medial data to be stored in a publicly-accessible and immutable format.

Pantera is excited to have participated in their token sale. We look forward to taking receipt of their Neuron tokens and using the live blockchain ourselves.


Pantera partners will be traveling over the next months to discuss the ICO disruption and Pantera’s fund offerings. We have organized group lunches in some of those cities should you want to meet other investors who share your interest in blockchain. Some of our dates include:

· New York City and Connecticut, November 1–3

· Detroit, November 3

· Chicago, November 6

· Los Angeles, November 6–7 and 14

· Seattle, November 15

· Los Angeles, November 20–24

· New York, November 27 to December 1

· Miami, December 4

If you are interested in a meeting, please contact Pantera’s investor relations team at 650–854–7000 or via

The future has arrived,

Dan Morehead


Token Types

We think there are three main types of tokens. We love to invest in the first type, we’ll invest in the second type if we think the team, market, and product outweighs it not being in the first category, and we don’t invest in the third type. The first type is tokens that are absolutely needed, and the platforms don’t work without them. Great examples of this are Bitcoin, Ethereum, OmiseGo, Augur, etc. They’re typically used to pay for network security to ensure that people behave honestly and accurately. They charge the bare economic minimum of fees needed to sustain the system. These projects have users; they don’t have customers. The difference between customers and users is that customers are milked via rent-seeking for profit. A common reason these tokens are absolutely required is that their networks are required to fork (and you thus couldn’t replace the token with ether because then you’d have to fork Ethereum each time the network needed to fork).

The second type is tokens that aren’t absolutely needed, as in you could use Bitcoin or Ether instead, but you do need to pay fees or use a token for something. The difference is they just have their own token and don’t absolutely require a new one. Sometimes these tokens are internal currencies in their respective projects. These tokens don’t charge unnecessary fees either, like the first type, they simply charge what is needed to sustain the system. These projects also have users. Great examples of them are Funfair, Unikrn, and Enigma.

The final type of tokens are ones which are not needed at all and charge unnecessary fees. These tokens insert themselves as rent-seeking middleman and charge fees which aren’t actually used for anything useful. Or, the fees are substantially higher than what they actually need to be in a competitive economy. We believe that, since all the code for these projects is open source, projects which attempt to do this will eventually have their tokens forked (removed) out and free ones with the unnecessary tokens removed will be released. These typically have customers as opposed to users, and they try to milk them as much as possible until their token is forked out.


While early-stage tokens are scrambling to get on the board, blue-chip cryptos such as Bitcoin and Ethereum are moving into phase two of cryptocurrency development: scaling. ‘Scaling’ in the context of blockchains refers to development activity which may increase transaction bandwidth, lower operating costs or strengthen security. Scaling can be achieved via updates to the Layer 1 blockchain protocol (Segwit, Metropolis: Byzantium/Constantinople, zk-SNARKs, and eventually, Proof of Stake). Additionally, Layer 2 transaction protocols (Sidechains such as the Lightning and Raiden Networks) can be developed to take pressure off the primary blockchain when users want to prioritize speed, customizability or transparency in the case of exchanges. These upgrades will also make development easier. For example, from Metropolis, Ethereum smart contract developers can test their contracts without spending gas running them through the network. We expect these improvements to boost the value of both bitcoin and ether tokens. We continue to monitor development all cryptocurrencies and tokens in our portfolios.


Ripple has Swift, the worldwide financial infrastructure provider, publicly set in its sights. As though to suggest that Swift’s 11,000 correspondent banks shift to Ripple for significant improvements in cost and efficiency, the Ripple Foundation has made a bold overture to Swift clients: The Foundation contracted Ben Bernanke and inventor of the World Wide Web, Tim Berners-Lee to speak at their Swell conference in Toronto on October 16- 19, coinciding with Swift’s annual flagship event: Sibos. Ripple’s ambition to devour existing financial networks is clear. And so far, Ripple has been stealing the spotlight. Attendees from Sibos have all been voting with their feet and flocking over to the Swell. We look forward to following their development in the coming months.


Some good material to start with on the development of blockchain technology and cryptocurrencies as speculative instruments:

“Bitcoin: A Peer-to-Peer Electronic Cash System” — white paper by Satoshi Nakamoto

“Blockchain investments and the new problem asset for conventional VCs by Jake Brukhman

Cryptoconomics 101 by Nick Tomaino, and his Tokens, Tokens and More Tokens

Fat Protocols by Joel Monegro

What does $300 Ether mean? by Vinay Gupta

Token Economy by Stefano Bernardi and Yannick Roux

Traditional Asset Tokenization by Stephen McKeon

The Rise of the Token Sale by Max Mersch

Making Sense of Cryptoeconomics by Josh Stark

Why Amazon’s Margin Is Filecoin’s Opportunity Forbes, Aug 28, 2017

Joey Krug RealVision Interview Excerpts: ICOs, Future of Digital Currency, Ethereum Flash Crash RealVision, Aug 10, 2017

Pantera Capital to Raise $100 Million in Investment for ICO Hedge Fund Coindesk, Jun 28, 2017

While Investment Firms Ponder ICOs, This Team is Barreling Ahead with a $100 million ICO Fund TechCrunch, Jun 28, 2017

Balaji CNBC Interview CNBC

US Fed Hints at Blockchain Integration Coindesk

Coindesk State of Blockchain Q2 Report Coindesk

The Isle of Man Welcomes ICOs Coindesk

Ethereum Metropolis Release Testnet To Launch Coindesk

Closure Steps for Chinese Exchanges Coindesk

China Shmyna, Bitcoin Trading is Way More Distributed Now Anyway Coindesk

Lawmakers Seek Tax Exemption on BTC Transactions Under $600 Coindesk

Two of the best books are Digital Gold by Nathaniel Popper for a fun high-level history and an in-depth technically-minded look Mastering Bitcoin and Mastering Ethereum by Andreas Antonopoulos.

And some additional information on the ICO model specifically:

Dan Morehead speaks at Sohn Conference CNBC

Dan Morehead speaks at Money2020 Conference Twitter

Recommended Primer: Token Mania

Kin Whitepaper

Kin Webpage

AVC Venture Capital on Kin

Tech Crunch Article on Kin

Tokenomics — A Business Guide to Token Usage, Utility, and Value by William Mougayar

BAT Whitepaper

BAT Webpage

Nick Szabo and Naval Ravikant on Tokens

Additional information on blockchain regulation:

SEC issued statement on ICOs and the DAO

China banned ICOs (one week before our roadshow was scheduled)

FINMA issues stricter ICO / AML regulatory compliance requirements

SEC puts task-force on ICOs

SEC shuts down Protostarr

South Korea Bans ICOs


We tweet Bitcoin news and insights on Twitter and Medium at @PanteraCapital, @Dan_Pantera, and @JoeyKrug.

You can subscribe to our publications by visiting or by e-mailing

Blockchain Letter: a monthly letter with our thoughts on significant market and ecosystem-related developments. Also, includes our thoughts on blockchain venture capital and news on our portfolio companies for accredited investors.

Blockchain Investor Letter: Public Letter plus exclusive information for accredited investors.

White Papers: periodic, original blockchain research and academic papers.

Portfolio Company Profiles: inside looks into some of our portfolio companies, featuring our general perspectives in addition to overviews of each company’s industry positioning.

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